How Risky is Financial Liberalization in the Developing Countries?

Using a sample of 27 developing and developed economies this paper asks whether financial liberalization is hazardous. It adds to the existing literature in four respects. First, it moves away from the binary coding used to identify crises, thus ignoring the difference between big and small ones. Second, it takes into account both domestic and external financial restrictions. Third, it looks separately at various instruments designed to restrict financial markets. Finally, it estimates in parallel the impact of liberalization in developed and developing countries. The main result is that financial liberalization is considerably more destabilizing in developing countries than in developed countries, leading to a boom-bust cycle.